چکیده انگلیسی

Managers prefer investors who share similar expectations of their firms' prospects. Instead of taking the distribution of investor types as given, we investigate the question of how the managers may be able to effect a change in the pattern of ownership in a world where outside shareholders hold heterogeneous expectations. Under the requirements that the mechanism is costless to the firm and involves no initial cash transfer among the shareholders, the solution is a menu of securities in the form of sidebets among the shareholders. Ex post, the mechanism allows the high-valuation investors to own a greater proportion of the firm and be rewarded with a greater share of the firm's wealth gains.

مقدمه انگلیسی

This paper is an exploratory study of a new class of issues in corporate finance strategies. Rather than accepting the conventional view in economics and finance that the manager is an agent hired by the shareholders, we raise the issue of how the manager–agent can choose owners–principals.1 We analyze, in a world of managers with superior information and investors with heterogeneous expectations, a mechanism design that can help managers increase the percentage ownership of shareholders who hold high valuation of their firms.2
The topic is significant for several reasons. First, having the ability to concentrate a more homogeneous group of shareholders would give the manager greater unanimity to support the pursuance of value maximizing investments at a later date. Without the support (or confidence) of her shareholders, even a properly motivated manager with performance-based compensation plans may not be able to carry out her program of value-enhancing investments. The manager's investment decisions may have to be biased toward quick payoffs to impress investors of her ability in order to hold on to her job. Second, if a manager could change the composition of the shareholders to those that hold more favorable expectations of the firm's prospects, she would also change the shareholders' perception of her ability and effort. These shareholders are also the class of investors who are more likely to increase the manager's compensation package and other employment-related implicit contracts. Third, in the presence of asymmetric information, investors may conjecture that when the manager makes such an offer, it conveys favorable information. A shift to having more shares in the hands of the high-valuation shareholders, current or just converted, may accompany an increase in share price. Thus, such a mechanism may produce a costless credible signal as a by-product.3 Fourth, a scheme that transfers shares from low- to high-valuation shareholders may provide a means for firms in the United States to attract a group of supportive, stable shareholders who hold the stock for extended periods of time. Fifth, and possibly the most significant though controversial implication, is that a share-transferring mechanism that increases the ex post value of the high-valuation shareholders' holdings would also transfer wealth to the high-valuation shareholders from the low-valuation shareholders. Thus, it may be considered as a means management can employ to reward supporters of their business strategies.
We introduce the notion of the ‘side-bet’ game as a mechanism design. We model a scenario in which there exists both asymmetric information between the firms and the investors, and heterogeneous expectations among the investors. Here, the management can make use of the existence of heterogeneous expectations among the investors to induce investors to make a side bet among themselves.
Firms are known to have sponsored side bets among their investors: pitting high-valuation investors against lower-valuation investors. For example, in 1988, Avon4 offered all its investors two options: one group, presumably the low-valuation investors, was given the option to accept the newly issued preferred equity-redemption cumulative stock (PERCS) in which they would receive higher dividends for an extra 13 quarters, but give up (or short) a call option. The other choice, presumably favored by the high-valuation investors, was to give up some dividends in exchange for the right to buy the rest of the firm by exercising the (long) call. The call option allows them to purchase the stocks from the first group if the stock price in the future turns out to be greater than the US$31.50 exercise price, as they had expected. As predicted by Avon's own survey of dividend preferring clienteles, about a fourth of Avon's shareholders choose to hold the PERCS. In effect, three fourth of Avon's investors paid a price equal to the present value of 13 quarters of dividends foregone to buy a call option from the other one fourth. A side bet between the two groups was thus created. If the expectations of the high-valuation group held, there would be a transfer of ownership where the 75% of high-valuation investors would own 100% of all shares. The mechanism allowed the firm's shares to be in the hands of its high-valuation investors. Over 40 companies have since used PERCS.
Our model yields the following results:
1.
A feasible share-transferring mechanism that is, ex ante, fair to all shareholders, is a package of securities consisting of both call and put options that are distributed pro rata to all shareholders free of charge.
2.
The model, given the desired percentage change in ownership, determines the ratio of exchange between the two securities, and their exercise prices.
3.
The mechanism is self-revealing; it makes every shareholder reveal his expected or reservation price after at most one round of exchange with the firm.
4.
The mechanism is ex ante Pareto optimal for all shareholders based on their own (set of heterogeneous) beliefs.
5.
Ex post, high-valuation shareholders will own more shares and gain wealth from the low-valuation shareholders.
Under the condition that they do not dissipate extra resources, the manager could only act as a catalyst to induce every investor to take part in a side bet. Based on their own valuations of the firm, shareholders would have to choose to bet with or against those who hold high valuation. Since the side bet is among investors, it involves no initial cost to the firm. It is a fair bet because each investor can voluntarily decide what actions to take, if any, so that his position is never worse off ex ante. In effect, there is a voluntary sorting of investor types that is not discriminating. After the fact, however, the mechanism is designed to have the high-valuation investors emerge as winners.
The paper is organized as follows. Section 2 introduces the framework of analysis; Section 3 gives the basic structure of the model. Section 4 presents an analysis of the side-bet mechanism. Section 5 shows how this mechanism can be accelerated to enable the high-valuation shareholders to achieve a target percentage ownership. Section 6 analyzes the mechanism in terms of the ex post returns to various shareholders. Section 7 illustrates the main results with a set of numerical examples. Section 8 discusses and compares the model with alternate mechanisms such as share repurchase to induce a transfer of shares. Section 9 presents the conclusions.

نتیجه گیری انگلیسی

The conventional view in corporate finance is that the manager is an agent selected by the shareholders. We investigate, in a world of asymmetric information with the managers possessing superior information and the outside shareholders possessing heterogeneous expectations, how managers may be able to affect the pattern of ownership, i.e., increase the fraction of shareholders who hold high expectations of the firm's valuation. Specifically, we seek an ex ante voluntary mechanism, which, if offered by the manager/catalyst to all shareholders, sorts the shareholders into high- versus low-valuation investors, with the former group holding more shares and realizing greater gains ex post.
Although the mechanism is ultimately designed to favor those who hold high valuations of the firm, it has to be ex ante “fair” to all shareholders, and they are allowed to make choices consistent with their beliefs. We argue that the only practical mechanism that can satisfy the above conditions that the offer be equitable, be ex ante Pareto optimal, and require no net cash flows from the firm or from any shareholder, has to be one that induces investors who hold different valuations of the firm to ‘bet against each other’. A fair bet with no initial cost to all shareholders would allow investors to reveal their true valuation and effect an ex post share transfer.
A particular mechanism that we consider is an offer by the firm to all shareholders of a menu of choices involving call and put options at a predetermined exchange rate between the options. We show that with a suitable design, i.e., the choice of an appropriate exchange ratio and exercise prices for the options, the following results are obtained: (1) high- (low-) valuation shareholders will choose to hold call (put) options, i.e., a self-revealing sorting, and (2) there is a set of exercise prices for these options in which share transfer from the low-valuation investors to the high-valuation investors is accelerated as the high- (low-) valuation shareholders exercise their call (put) options to buy (sell) more shares. Ex post, when compared to the pre-offer situation, high-valuation investors will own more shares and realize greater wealth gains. The more rapid concentration of ownership in an earlier period allows the firm to achieve greater unanimity to make decisions in later periods. It also achieves the second objective of rewarding high-valuation shareholders as supporters even in a one period model.